Readers' comments

vyctorynotes.blogspot.com says: I liked this piece. I'm interested in knowing more. For example, can you give us information on how and when wages have been increasing due to inflation? Whose wages have been increasing with inflation? What countries have the best pension plans and what are they worth?

There is one measure of inflation that is MASSIVELY better than any of the others - median inflation. It does not rely on a WEIGHTED BASKET of goods - the "weighting" and "basket" selection both being distortions.

Having said that, I don't think anyone should be upset that generation greed are being made to participate a little in the world of financial sacrifice.

We can talk about this until the cows come home, but, this manipulation will continue until the politicians of flamboyance succumb to those of hard work and those who have the ability to influence overseas business. Currently, our administration is centered around cute publicity stunts, television celebrity, and other hollow efforts to entertain the masses. This reminds. One ofa time of courtyard diplomacy such as was seen during a certain French monarchy

As I stated on another blog post, retirees and soon to be pensioners create a ratcheting effect on entitlements as they will vote to preserve their benefits and as the population ages the growing weight of this cohort will increase.

Switching to a less onerous index linking measure is the least worst of realistic options open to governments wishing to at least delay fiscal Armageddon.

“Workers can generally expect their wages to rise with inflation…”
Not necessarily. Median wages declined dramatically through the high inflation years, from 1973 to 1992. They began to recover during the low inflation 90’s, but plateaued in about 2000. The upper quintiles tend to fare better than the lower ones in recouping the damages caused by inflation.

This is essentially a form of lying - we're going to cut your pension, but we're not going to tell you that that's what we're doing, and we're going to do it by lying about what the rate of inflation actually is.

It's disgusting, but it's also somewhat appropriate. A society that indicates (by votes) that the truth is unacceptable cannot be surprised when politicians lie to it.

Tinkering with the CPI can have untoward consequences. If Owner's Equivalent Rent had not taken the place of actual home prices, the disastrous real estate bubbles that contributed mightily to the latest bust could not have happened, because the house price increases would have shown up in headline inflation where they could not have been ignored.

We've been fiddling with the CPI for decades in America, always to lower the apparent rate of inflation. This is as much for political as for fiscal advantage. Occasionally, someone will write an article showing how rapidly prices are rising according to the old rules, and it is always shocking.

Hey, Economist, how about giving us a comprehensive study of the history of this particular scam?

That depends on which inflation measure you track. Cpi hasn’t increased that much, but cpi measures just a small part of total price increases – just consumer goods. Monetary pumping also creates asset price increases. Gold is not perfect, but it measures total price increases where nothing else does.
Other commodities, such as oil and copper, respond more quickly to monetary policy, but also are affected by business conditions.
Gold prices were held artificially low until 2000 by central bank sales/lending of gold. When central banks reversed their gold policy, gold made up for the manipulation in the 90’s by recovering all lost ground.

Almost any commodity which does not have a mythic value would be a better index of inflation than gold (or silver). If it has widespread use in manufacturing, that makes it even better, because the changes in nominal value will diffuse across the economy.

No, any commodity won’t do. Most commodities, such as aluminum and copper, or food, are much more volatile than gold because sometimes their prices reflect the change in the purchasing power of money and sometimes they reflect just changes in tastes, business cycles, technology and other things.

Industrial commodities are consumed, too, so the supply changes a lot. Almost all gold ever found still exists in someone’s ownership. Mining adds very little to the total stock of gold. So the supply remains as constant as is possible in an imperfect world.

Gold is not mystical. Only those who don’t understand how money works think so. It is valuable as a measure because of its durability and constancy of supply. Only with a reference point that remains fixed can you measure things that change rapidly.

Gold is a rock that is dug out of the ground and its value varies like any other commodity. Let's be honest here, there is no good way to measure inflation. Targeting inflation never does/never will make any sort of sense. In my opinion, inflation should be measured by the cost of living. Super easy monetary policy causes the price of necessities to increase more than the prices of things like Iphones which drop in price due to technological improvement, so CPI underestimates the actual amount of inflation.

Why not replace gold with silver, or platinum, or palladium, or any other rock. There are plenty of things other than gold that have the same amount of durability and the constancy of supply. Gold is useless as a measure of inflation because it is also vulnerable to speculation just like any other commodity or asset(see 1979-1981).

Gold is just a rock, but like iron or any other commodity, it has value because people value that rock for how it can serve their purposes.

Economists find measuring inflation useful in that it allows them to compare different time periods. Without some way of adjusting for price inflation, printing money becomes the path to extreme wealth, even if you’re $1 trillion bill will buy no more than a loaf of bread.

Gold has so far proven the best measure for all of the reasons gold enthusiasts have presented for centuries: it’s not consumed and doesn’t erode, so almost all of it ever found still exists. Mining adds little to the current stock, so the amount of gold stays relatively constant.

The only other commodity that comes close to gold as a constant is land. Most land has been explored and valued, so one could use the price of land as a guide to price inflation. However, there are large variations in the quality of land, from desert to high productivity farm land.

Silver is a good measure of inflation but not as good as gold because it is consumed in industrial processes so the stock changes frequently. Platinum is good but the stock is so small as to make it impossible for widespread use as gold.

Gold has the “goldilocks” combination of attributes that have made it the preferred form of money for millennia as well as a good, not perfect, measure of inflation.

Think of measuring inflation as if it were a distance. Would it make sense for the meter to be different lengths in each country and vary widely in length over time? No, a constant length for the meter aids in planning and comparison. The quantity of the measure of inflation is similar to the length of the measure of distance. The quantity needs to be as constant as the meter.

Everything you said is true; however, we also have to look at the time frame we're measuring on. Gold in 2008 was around 800; in 2011, it peaked at around 1800. Over those 3 years, there is no way anyone could possibly convince me that inflation was at 30%. So gold is a terrible measure of inflation year on year because it varies in price like any other metal. However, if we're looking at a time span of 40+ years, I think you're right. However, in the context that we're concerned with now, I think gold would be a terrible measure of inflation.

If you look at land prices, particularly farm land, the stock market and bond markets, we have had inflation of 30% in that period. I have read that the price of farm land in Nebraska has increased 30% per year for several years. We haven't had cpi inflation of 30%, obviously, but cpi doesn't measure asset price inflation.

Price inflation comes from expansion of the money supply by the fed. Sometimes the new money goes into consumer goods, sometimes into assets. Mainstream economists have fooled people into thinking asset price inflation is good and so doesn't need to be considered. It's not good.

Gold isn't perfect and its price can be manipulated by central banks, but it's better than anything else out there.

I would say that the shifts in the price of gold and other assets also has to do with the shifts in expectations as much as it has to do with inflation. For example, how many people were calling hyperinflation in 2008 when the real threat was a debt deflation? I think that was the primary cause in the shift in gold prices. I would also like to add that from 2007-2011, the price of oil and many other commodities actually dropped. The price of real estate dropped. Even in markets that CPI doesn't measure, we've seen prices drop over that period while gold climbed. My point is that the shift in gold prices is primarily caused by a shift in sentiment, not necessarily due to inflation. For example, the gold price dropped from the peak in 1981-1985. However, I don't think anyone would've said that there was deflation during the same period. The same goes for 2011-today. The price of gold dropped while cost of living and assets have gone up, but have we had deflation? Of course not. Gold is a horrible measure of year to year inflation. I would argue that even CPI is a better measure of inflation than gold.

One political subtext is that by creating a class with a vested interest in a lower CPI we become more attuned to keeping to that. Have no idea if it will work but the idea is hidden in there. Seniors are vocal about their financial interests so the idea is to make them push for other measures to match the one they get.

Well said - +1 - seniors stand to become the most vocal opponents of QE if CPI protection is substantially diminished. The alternative to QE is to borrow in the market, which would raise interest rates (seniors would cheer that), and off-load their financial burden onto their grandchildren. Seniors love their grandkids, but they love themselves more - gotta say 'no' to them on this IMO.

There'd better be room for a high inflation future. The last time we had debts this high (1940s), we never paid them off but made them shrink with growth and inflation. With populations stagnating, we're going to have to use a lot of inflation this time. It would be a triumph of political honesty if the government passed a law directing the federal reserve to retire 3% of the outstanding debt each year with newly created cash. They'll hide it better than that, but inflation is the only politically realistic solution to high debt. Most people aren't very good at math or economics, especially retirees.

Some debt restructuring would be nice and it would reduce the amount of inflation you would need. In the business sector, this could be done through a systematic conversion of debt to equity. In the household sector, the debt could be reduced through writedowns, reductions in interest payments, etc. This, along with some inflation, would be the best way to kick start the economy and wouldn't hurt those on fixed incomes as much as inflation alone.